NPK - Verde Agritech

[jgsurita]

Verde Agritech is a company controlled by brazilians, which operates a mine of a potassium fertilizer in Brazil, but a very different one! Nowadays around 95% of all potash used in brazilian agriculture is imported as potassium chloride (KCl) from mostly Russia and Canada, in total 10.5 million tons per year. Verde started in 2009 the "Cerrado Verde Project", a project to substitute the KCl by operating a mine in Minas Gerais State and by using its glauconitic siltstone as a fertilizer. They got the environmental license and in 2018 they started mining and selling the product, called K-Forte (Strong-K in english). I am a farmer in Brazil and I buy tons of KCl every year and I found this company by atending local a sustainable agriculture event. I decided to budget how much it would cost me, and surprisingly it was 15% cheaper than the KCl, in terms of $ per kg of potassium. I tried the product in 2020 in my cattle farm and it really impressed me. And when I find someone else who tried it, the person always praises the product, so it's not only me!

What impresses me most about the company is its product and therefore its competitive advantage. So let me explain about the two products (KCl and K-Forte).

KCl is composed by 60% of potassium. It is sold in granulated form and stored in so called big bags (bags that contains 1 ton of product). When someone buys it here, pays the price of the product in dollar plus freight from port. To apply the product you have to use a drawn spreader. The potassium chloride has 2 important characteristics:

1. When the product has already been applied on the field and it rains, the KCl instantaneously dissolves in the water and when the water leaches too deep in the soil, it may steal a considerable part of the K. The amount depends on "soil quality", a clay soil can retain more nutrients by electrical forces, while a sandy soil can retain just a little. So usually when you have a sandy soil you can't apply all the KCl needed by the plant on the soil at the same time, you should divide into more applications, in order to lose less K by leaching. In general you have to apply more K than necessary in order to expect the plant will absorb the K you want.

2. Because of the leaching problem, the product is preferably applied when the plant has already grown a little and has longer roots, in order to absorb more product.

3. The KCl has a problem because it also has Cl, which has a germicide power and it kills most of the microorganisms in the soil and the interaction between these microorganisms and the plant is very beneficial.

K-Forte has 10% of potassium, 25% of Si and 0.5% of Mg. It is produced in a a city called São Gotardo, where the mine is located. The product is sold in a powder form and also in big bags.The same drawn spreader is necessary to apply the product. Some technical characteristics:

1. After it rains, the potassium is slowly released for about 8 months, so it doesn't have the leaching problem. That is perfect for sandy soils and also for efficient use of all the potassium you are buying. Farmers usually plant soybeans (3 months) and corn (4 months) in the same year, so only one application of the product during the dry season would be enough to provide enough potassium for both cultures. For perennial cultures, such as cofee, cattle pasture (my case), orange, lemon, banana, etc, the product is simply perfect since the plant is always there and needs a slowly potassium disposal.

2. The product is usually applied in the dry season, when there is more time and workers available to do the job.

3. The product doesn't contain Cl. Therefore it is also a certified organic product.

4. The product contains a lot (25% of) silicium. The silicium helps the plant to protect itself against insects. When I first used the product in 2020, I reformed 2 areas to plant a grass (forage) that always attracts caterpillars and when I planted it before, I always had to apply insecticide, which are expensive, to protect the grass. What impressed me is those 2 areas is that there was no caterpillar at all, so it really worked.

Nowadays the company sells K-Forte about 10-15% cheaper than the KCl, in order to atract new clients to know the product. One disadvantage of K-Forte is its freight expenses, since it has a lower concentration of K, 6 times lower. The K-Forte price is set according to the distance from the industry, so they have a competitive price with most margin possible. Let me give an example, in my case, to deliver to the city of Ribas do Rio Pardo:

KCl costs 430 U$/ton (product) + 33U$/ton (freight) = 466 U$/ton. Since it has 6x more K, I divide by 6 the KCl price: 71,66 U$/ton (product) + 5,50 U$/ton (freight) = 77,16 U$/ton

K-Forte costs me 30 U$/ton (product) + 37 U$/ton (freight) = 67 U$/ton.

So it is cheaper in U$/kg of K, has additional silicium, doesn't contain Cl, the K will be more efficient absorbed by the grass and it is operational cheaper since I have to apply the product just once. If they have to sell the product to a further city the company lower its margin to still sell the product. So it cannot be sold to the entire country, because there are some distant states from the mine, such as Acre and Rio Grande do Sul, but for the most important agriculture states (~75%) it is possible to be sold with margin. Today the cost to produce 1 ton of K-Forte is about 8,50 U$/ton, not considering sales and administrative expenses.

Aiming to reduce the freight disadvantage against the KCl, they have already developed a new product, containing K-Forte + sulfur, which increases the value of the product sold and therefore dilutes the freight cost. They developed a new thecnology called Micron S, where the S is microgranulated instead of the conventional granulated S sold, and mixed with K-Forte. Basicaly the microgranulated S is better spread on the soil and so easily for the plant to absorb it. They are also developing new technologies, one of them will be released in june.

About the management, the CEO, Cristiano Veloso, is really outstanding and has almost 18% of the shares and he is still buying more (just bought more in december).

The KCl market, as I said is about 10.5 million tones in Brazil, converting to K-Forte concentration of K it would mean 63 million tons of K-Forte. In its first full year in 2019, the company sold 120 thousand tons of K-Forte, in 2020 they sold 244 thousand tons, for 2021 they expect a 60% increase in volume and have already this week increased the initial guidance for this year. Since 2018 they are only increasing margin by reducing production costs from scale gains and by diluting selling and administrative expenses. In 2020 they had a 9.1 CAD million revenue and 1.1 CAD million before taxes profit in 2020. They have a environmental license to extract more than 500 thousand tons per year but are already acquiring the license to expand the permission to 2.5 million tons per year.

Basic numbers: The company today is priced at ~60 million CAD.

The company is really small, when I recently contacted the Investor Relations e-mail to ask some questions, they set a meeting for me directly with the CEO, Cristiano, which helped me with all the questions I had.

Growth potential: I know it is harder for anyone who doesn't use the product to understand, but as a farmer and client it is easier for me to see that the product sales will increase a lot. My reasons to believe that:

1. As explained, the product does have a much better quality and since it is the only competitor to KCl it has a long term competitive advantage that might allow K-Forte to be sold at higher margins.

2. K-Forte market share is still low since the product is new (244/63000=0,387% of market share), so it has a lot of room to grow.

3. The mine has enough K-Forte to supply the country agribusiness for a century.

4. In the future, when the product becomes more known they might be able to sell the K-Forte at the same price of KCl, increasing their margins. They will also have some scale gain which will reduce production cost.

5. New products developed by the company are adding value per ton of product and might reduce the freight disadvantage of the product, expand margins and therefore reach of the product.

6. The CEO is outstanding and manages the company really well.

What might reduce growth speed is the conservative/traditional characteristics of farmers, which have always been using KCl their entire lives. The challenge is to convince them to try a new product.

If I had to guess how much their sales would grow, seems reasonable to me they will achieve at least 10% of the market share in the country, which would mean grow by 30 times. Given the low cost to produce it and the product advantages it seems really possible and a conservative estimate in my opinion. After getting the license to produce 2.5 million tons (which would mean grow by 10x), the company already wants to get the license to produce 25 million tons per year (grow by 100x).

 

 

Edited May 22, 2021 by jgsurita
grammar misstake